But here’s another issue to consider in your analysis. If the product or service on which you’ll offer a discount is subject to sales tax, on what value should sales tax be calculated? Should sales tax be charged on the full value of the product or service? Or should sales tax be charged on the discounted value?
In some Groupon transactions, the consumer is pre-paying for a specific item or service, e.g., a specific piece of jewelry or a carpet cleaning service, while in others the consumer is buying a voucher that be used to purchase from the retailer’s offerings. In the former, an actual sale of the product or service has occurred (even if possession doesn’t take place until a later date), while the latter operates like a gift card as what has been purchased is a cash equivalent that will be used to purchase “something” but whether that “something” is taxable or not isn’t known just yet. Some of my fellow SALT colleagues have suggested that a Groupon is neither a retailer’s or manufacturer’s discount or a gift card equivalent, but some type of hybrid, and have noted that it’s difficult to apply existing law to a hybrid.
While authoring this piece, I also reached out to my own state, Massachusetts, after my research found limited guidance. (See Note B below) In my query to the Massachusetts Rules and Regulations Bureau (the department within the Legal Division which interprets the statute and authors regulations and administrative guidance explaining the law), I noted that the existing law and guidance do not appear to address how sales tax applies specifically to Groupon type arrangements. The Bureau’s e-mail response to my inquiry (See Note A below), confirmed that indeed, the Bureau had not issued guidance on Groupon type arrangements, stating that they have yet to receive a fully documented ruling request as required by the Massachusetts administrative provisions. Their response added that without a formal ruling request detailing the specifics of these arrangements, the Rules and Regulations Bureau lacked sufficient information as to exactly how these promotions work and if they all work in the same way. Interestingly, despite this statement, the response also stated that the Bureau does not believe that Groupon certificates qualify as retailer’s or manufacturer’s coupons, which do reduce the taxable sales price in accordance with the Massachusetts sales tax rules.
But what about the remaining states that impose a sales tax? Well, you can bet that Groupons are on the radar of many revenue hungry states. But despite an elevated interest in how participating retailers are handling sales tax, some state officials, such as Jeannine Koranda, a spokesperson for the Kansas Department of Revenue, agree that “it’s an area where a lot of states are finding that technology is outpacing their laws.” (See “Kansas Department of Revenue monitoring sales tax collections by retailers using Groupon“, by Christine Metz, LJWorld.com, 2/27/11) Brad Malone of New York’s Department of Taxation and Finance, voices a similar concern in the Forbes article, stating that the current New York regulations on the taxation of discounted merchandise do not seem to cover the Groupon model. And, as just noted, Massachusetts has yet to state an official position on how the Massachusetts sales tax rules on discounts apply to Groupon type arrangements.
Note A: The e-mail response received from the Massachusetts Department of Revenue’s (DOR) Rules and Regulations Bureau is what is referred to as an “Information Letter” (as defined in Letter Ruling Regulation, 830 CMR 62C.3.2.) It is intended to provide general information such as the potential applicability of DOR public written statements or well-established principles of tax law, but it is not intended to provide authoritative guidance on the application of the tax laws to a specific set of facts, therefore, it is not a “ruling” or “letter ruling” that is legally binding on the DOR.
Note B: Limited guidance on this issue was found in an Information Letter issued by the Department. (see http://www.benedelman.org/restaurants/ma-opinion-033010.pdf). Although this Information Letter clearly addresses a Groupon type arrangement, as stated above, it is not considered authoritative guidance, and is not binding on the Department.